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China Regulator said to seek to curb third mortgages
Published on: 2010-02-02
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Feb. 2 (Bloomberg) -- China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans, a person with knowledge of the matter said.

The China Banking Regulatory Commission warned lenders of the risks associated with “hot money” flowing into the property market, the person said, requesting anonymity because the agency hasn’t published the measures. Mortgage defaults in China are rising, the person said without giving figures.

China’s $1.4 trillion of new lending last year ignited a real-estate boom, with prices in 70 cities rising at the fastest pace in 18 months in December. An index tracking property companies traded in Shanghai fell to a nine-month low today on concern the government will tighten real-estate credit to prevent a bubble from forming.

Tighter rules on third mortgages “should have some effect on home prices, especially in regions such as Hainan,” said May Yan, a Hong Kong-based analyst at Nomura International HK Ltd.

China’s southern Hainan province will suspend land leasing and development approvals after developers flocked to the island following a government announcement to promote local tourism, fueling concerns about a property bubble, the Xinhua News Agency reported Jan. 17, citing local Party chief Wei Liucheng.


‘Bubble’ to Burst


The regulator also told banks to stop granting new loans to developers found to be hoarding land or intentionally delaying property sales, and to take measures to make sure existing advances are repaid, the person said.

Banks were told they should reject loan applications from people buying homes for “investment and speculation” purposes, the person said. Lenders were asked to raise down payments and interest rates for third mortgages by a “broad margin” if they’re unsure of a borrower’s intentions, the person said.

The Shanghai Composite’s 34-stock property index fell 1 percent today to the lowest since April 29, 2009. Andy Xie, an independent economist who was formerly a researcher at Morgan Stanley, said the nation’s real-estate “bubble” is poised to burst as credit dries up.

As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today.


Credit Tightening


The State Council, China’s cabinet, said Jan. 10 it will step up guidance on property lending and seek to counter speculative capital from abroad to tackle “overly-rapid” price gains in some cities. It told banks to abide by a minimum 40 percent down-payment requirement for borrowers’ additional mortgages and set interest rates according to risk assessments.

China’s banks are required to price loans for second homes 10 percent above the benchmark lending rate. The rate for five- year loans in China stands at 5.94 percent.

“The CBRC will continue to enhance monitoring of the property market, timely remind banking institutions of risks, and guide banks to optimize loan structure and prevent lending risks by using regulatory indicators including capital adequacy ratio, loan provision ratio, liquidity ratio and down payments,” the regulator said in an e-mailed statement.

In a Jan. 12 move that surprised economists, the central bank ordered lenders to set aside larger reserves for the first time since June 2008, the most drastic step so far to cool the economy. China’s economic growth accelerated to 10.7 percent in the fourth quarter, the fastest pace since 2007.


Foreign Buyers


Lenders extended 952 billion yuan ($139 billion) of home loans in the first nine months of 2009, a fourfold increase from a year earlier, according to the People’s Bank of China. The PBOC doesn’t break out second or third mortgages.

The CBRC also said capital flows into Chinese assets have increased “noticeably” as investors engaged in so-called carry trades, according to the person. A carry trade involves borrowing in a country with low interest rates, converting the money into a currency where borrowing costs are higher, and lending the funds at a higher rate.

Almost 40 percent of buyers of luxury residential properties worth more than 10 million yuan last year in Shanghai were from overseas, the person said. The CBRC found one case where 38 foreign citizens who never entered China managed to take out mortgages from a bank in Shanghai through their agents and lawyers, without providing necessary documentation, according to the person.

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